Mining News

Shifts in Energy Policy Taking a Bite out of China’s Coal Sector

This past April, top policy makers in Beijing announced in newly published documents that “market forces” should decide how electricity is generated, transmitted and distributed--not the state--throughout China.

This is a continuation of energy price reforms the state set out in 2013. April’s announcement by the National Energy Association (NEA) indicated that 2015 would be an integral year towards achieving these reforms.

Previous to this agreement, China had exerted price controls on electricity and power transmission. The opening up of the market might make coal slightly less competitive, allowing oil, gas and even renewables, which China has been increasingly pursuing, to snatch up market share.

Currently coal generates 80 percent of China’s electricity supply and around 2/3 of total energy.

China’s coal mining industry is already feeling the pain of this new policy change driven by the sustainability agenda. From January to November 2014, China saw a 2.1 percent drop in coal production compared to 2013 production numbers.

This trend is expected to continue. The China National Coal Association (CNCA) expects a further decline in coal production of 2.5 percent in 2015.

With regards to the vast amount of coal producing capital in the region, China’s coal mining sector has seen a shutdown of 5,920 mines over the past five years. Excess inventories and over capacity are building and adding more costs to the mines.

Recent reports indicate that China has decided not to approve any new mining projects until 2020, indicative of the country’s slowing industry.

China’s diminishing interest in investment in coal production is reflected in the Fraser Institute’s 2014 Annual Survey of Mining Companies. Since 2012, the region has seen a declining investment attractiveness rating, a measure of policy and mineral potential, moving from 69/96 in 2012 to 97/122 in 2014.

The survey also shows China’s Policy Perception Index (PPI) rating trending down since 2012, where it sat at a score of 28.51 with a ranking of 72/96 surveyed jurisdictions. Today, China’s score is down to a 20.73, ranked 103/122 jurisdictions, representing a 27 percent drop over three years.